The Counterfactual Analysis in EU Merger Control

Posted by Social Science Research Network

The Counterfactual Analysis in EU Merger Control

ABSTRACT: The counterfactual method, which can be used to assess the effects of an actual or a hypothetical event, has always played an important role in EU competition law. It has recently gained further traction as the Commission endeavors to adopt an effects-based approach under Articles 101 and 102 TFEU. Counterfactuals are discussed in various Article 101 guidelines and in the Article 102 Guidance Paper. In June 2013 the Commission published a Communication and a Practical Guide on quantifying antitrust damages, which contain a detailed analysis of various counterfactuals.

In this paper, we examine the use of the counterfactual method in EU merger control. The goal of EU merger control is to prevent transactions that would significantly impede effective competition. As pointed out in the Horizontal Merger Guidelines, in order to evaluate the effects of the transaction the Commission conducts a counterfactual analysis by “compar[ing] the competitive conditions that would result from the notified merger with the conditions that would have prevailed without the merger”.

The term “counterfactual” refers to the hypothetical scenario in which the merger would not take place. If the Commission finds the counterfactual to be significantly more pro-competitive than the merger scenario (“the factual”), it would oppose the transaction unless the parties offer adequate remedies.

Because EU merger control normally takes place prior to the implementation of the merger, the counterfactual in merger cases is usually the status quo ante, i.e., the situation that exists at the time when the Commission reviews the merger. However, in certain circumstances the Commission has adopted a more dynamic interpretation of the counterfactual. This dynamic approach was initially developed in the context of the “failing firm” defense and was later expanded to certain other scenarios.

In the next section, we discuss static and dynamic counterfactuals and demonstrate that the dynamic counterfactual is a manifestation of the prospective analysis of mergers. In subsequent sections, we discuss two main categories of dynamic counterfactuals:

• Market exit counterfactual: this comprises scenarios in which in the absence of the transaction the target would go bankrupt (failing firm defense) or would be acquired by another operator. In these scenarios, the Commission seeks to determine whether in the absence of the transaction competition would deteriorate even more than in the event of the transaction.

• Market entry counterfactual: in this scenario, the Commission seeks to determine whether in the absence of the transaction competition would improve because one of the parties would enter the relevant market on its own.

We conclude that the Commission’s approach to the “market exit” counterfactual is generally satisfactory. Recent cases such as JCI/Fiamm demonstrate that the Commission is capable of conducting a sophisticated analysis of the non-merger scenario in which the target exits the market. Conversely, we believe that the Commission’s analysis in cases involving potential market entry is too static and should evolve in the direction suggested by the EDF/Segebel case.